Home Renovation Loan

Home renovation loans, also known as home improvement loans, are available to consumers looking for financing to upgrade, renovate or repair their home. Both existing home loan borrowers and new customers can avail home renovation loans. Most banks, non-banking financial companies (NBFCs) and housing finance companies (HFCs) offer this facility either as part of their standard home loan product or as a separate offering within the larger category of home loans.

Home Renovation Loan Processing Fees & Prepayment Charges

Most banks, NBFCs and HFCs charge processing fees from both new and existing borrowers for availing home improvement loans. Processing fees for home renovation loans typically range between 0.25% and 2.00% of the total loan amount. RBI has put in place strict guidelines to prevent lenders from charging prepayment fees on floating rate loans. However, lenders have the discretion to charge prepayment fees on fixed rate loans or waive them off altogether.

Home Improvement Loan Eligibility Criteria

The eligibility criteria to apply for the home loan are as follow.

• Resident Indians are eligible to apply for a home improvement loan. Some lenders also offer home renovation loan to NRIs
• Age: Lenders typically offer home renovation loans to new loan applicants or existing borrowers (in case of balance transfers) who are 18 years of age or older. However, they usually want their home renovation loans to be repaid by the time the borrower reaches age 70.
• Both salaried and self-employed individual's / business owners can apply for a home improvement loan
• Borrowers can also enhance their eligibility for home loan by adding co-borrower(s), selecting a longer loan tenure or providing an additional source of income
• Credit Score: Loan applicants with a credit score of 750 or higher have a higher chance of getting a home improvement loan. Many lenders also offer home improvement loans at lower interest rates to applicants with higher credit scores.

Individual lenders may also consider other factors such as applicant’s income, liabilities, properties owned, work experience (for salaried individuals) and business continuity (for business owners) etc. while ascertaining the eligibility of a home improvement loan applicant.

Features of Home Renovation Loan

Below mentioned are some of the features and benefits of the home renovation loan.

1. Loan-to-Value Ratio

When it comes to home renovation loans, the LTV ratio is the total proportion of the property value that can be financed. Lenders usually offer up to 100% of the renovation estimate, subject to the condition that the LTV ratio offered for a home renovation loan should not exceed the home loan LTV ratio limit prescribed by the RBI. The details of the loan amount and the respective LTV ratio are given below:

Banks, NBFCs and HFCs undertake a credit risk assessment to ascertain the final LTV ratio for a loan applicant. The factors considered during the credit risk assessment process include the borrower’s credit profile and repayment capacity, market value of the property, etc.

2. Loan Tenure

Lenders usually provide home renovation loans for tenures of up to 20 years with some lenders offering loan tenures extending up to 30 years. Most banks/HFCs offering the home renovation/improvement facility under their home loan product provide repayment tenures of up to 30 years.

• Lenders take into account the repayment capacity of an applicant while deciding their loan tenure.
• They usually require loan applicants to restrict their monthly EMI contribution, including that of their proposed loan, to be within 50-60% of their net monthly income.
• Loan applicants availing renovation loans can use home loan EMI calculator to ascertain the both the loan tenures and EMIs for their home renovation loans depending upon their repayment capacity.

Tax Benefits of Home Renovation Loan

Home renovation loan borrowers can claim interest repaid of up to Rs 30,000 per financial year as tax deductions under Section 24(b).

Availability of Balance Transfer Facility

Existing home renovation loan borrowers can avail the home loan balance transfer option, wherein they can transfer their outstanding loan amount to another lender at a lower interest rate. This aims to reduce their overall interest cost. Note that the new lender will carry out a detailed credit risk assessment of the applicant before approving his balance transfer request.